Mixed review for SEC accounting fixes

Roundtable tackles Enron fallout as agency seeks input

By

NicoleMaestri

MattAndrejczak

NEW YORK (CBS.MW) -- A panel of financial experts led by famed value investor Warren Buffett voiced skepticism Monday that rotating auditors would ensure that corporate financial statements are adequate and trustworthy.

A proposal by the Securities and Exchange Commission to create a new self-regulatory agency to supervise the accounting industry also received mixed reviews.

During an SEC roundtable discussion Monday morning, panel members said accountants need time to understand a company's business. Auditing mistakes are typically made in the first two years of an accounting firm's specific assignment, they said.

"Rotating could be a mistake," said Buffett, chairman of Berkshire Hathaway
BRK.B, +2.84%

In the wake of Enron's
ENRNQ
dramatic demise, lawmakers and consumer groups have suggested that new rules be enacted forcing companies to change auditors, possibly every four years.

The SEC held the roundtable to determine what the agency should consider as it prepares to issue new corporate disclosure and auditing rules to address problems connected with Enron's meltdown. It will hold a second roundtable Wednesday in Washington.

SEC Chairman Harvey Pitt has said his agency must act quickly to overhaul regulatory policy.

"This is not a sixth month project," Pitt told reporters at the roundtable. "We have to move much more rapidly than that."

Pitt has already proposed establishing a new accounting oversight body to be funded by the private sector and predominately made up of non-accounting professionals.

But that proposal came under mixed review, with some on the panel backing the body and others contending it would not be effective.

"The SEC has been almost consistently starved for resources," said Melvyn Weiss, a lawyer with Milberg, Weiss, Bershad, Hynes & Lerach, and a vocal opponent of the SEC proposal. How could the SEC be expected to enforce these new rules if it doesn't have the money to hire and retain the best and brightest, Weiss asked.

He proposed instead starting an independent government agency that would be led by presidential appointees.

Deloitte & Touche CEO James Copeland said an independent government accounting body should be established to probe auditing scandals as the National Transportation Safety Board investigates airline disasters. He doubts if audit failures can be prevented.

"We have airplane crashes every year where people die and we still fly airplanes," Copeland said.

In early February, Deloitte became the last of the Big Five accounting firms to announce changes to its practices and policies due to worries over financial disclosure at U.S. companies following Enron's collapse. Deloitte reluctantly said it would split its consulting arm from the rest of its business. Read more.

Buffett said the SEC's proposal to police the accounting industry wouldn't have much impact. "I wouldn't expect a great deal from it," he said.

Pitt has also made plans for stricter, swifter enforcement, as well as for plain-English financial statements and giving the SEC an expanded role in the Financial Accounting Standards Board's rule-making agenda.

Again, panel participants expressed concern that the SEC won't be able to oversee new rules if it remains vastly underfunded.

"We can't expect the SEC to shepard these changes ... if it's starved for resources," said Joel Seligman, dean of the Washington University School of Law in St. Louis.

'Chief disclosure officer'

While they agreed that changes should be made to restore investor confidence in the U.S. capital markets, roundtable panelists warned that the SEC and Congress should not act in haste, especially with regard to corporate disclosure laws.

Buffett argued that corporate chieftains should be more forthcoming with the information they know.

"I would suggest that the CEO regard himself as 'chief disclosure officer' of the company," Buffett said.

In addition, the panel suggested that audit committees should not be held to heightened liability laws.

"We have to encourage them, not scare them," Friedman said.

Others speaking at the roundtable were Dwight Churchill, the head of the fixed income division at Fidelity Investments; and Richard Grasso, chairman of the New York Stock Exchange.

Others have been weighing in on what must be done to protect against another Enron.

Last week Federal Reserve Chairman Alan Greenspan said he wants accounting changes. While American corporate governance is the best in the world, Greenspan said, "we do need to fix what is wrong with our system." Read more.

In particular, Greenspan said the way stock options are treated should be changed. Under current standards, companies do not have to take a charge against earnings for the cost of giving options to employees and officers.

Corporations tried to "to game the accounting system in a manner to create the perception of short-term earnings growth which would be confused with long-term earnings growth," he said.

Congress has also weighed in with suggestions.

Senior lawmakers on the House Financial Services Committee have introduced competing legislation. A separate bill introduced last week would create a Federal Bureau of Audits that would examine the books of all publicly traded corporations in America.

The bill has little hope of final passage, but it could help set the outside limits of the debate over the accounting industry. See full story.

The Senate banking committee will hold hearings Tuesday and Wednesday focusing on accounting and investor-protection issues raised by Enron's collapse.

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